7 Things You Didn’t Know About ETFs

Exchange Traded Funds – or ETFs – have gained massive popularity among both private and professional investors in recent years. However, even though many have heard of them, there are still many aspects that are often overlooked. Here are 7 surprising and somewhat hidden facts about ETFs that even experienced investors might not necessarily know.

#1: Not All ETFs Are Equally Transparent

Although most ETFs are known for their transparency, there are actually several types – and some are less open about their holdings. In particular, so-called “synthetic ETFs” use financial instruments such as swaps instead of directly owning the underlying assets, which can make it more challenging to discern the risks.

#2: Some ETFs Are Actively Managed

Many believe that all ETFs are passively managed and merely track an index, but that is not the whole truth. Actively managed ETFs have become more common and aim to outperform the market through active portfolio management – although often with slightly higher costs.

#3: ETFs Can Trigger Tax Surprise

Although ETFs are generally tax-friendly, especially in the USA, there are specific rules in other countries. For instance, in Denmark, most foreign ETFs are taxed as capital income, and some are categorized as “mark-to-market” taxed, meaning you pay tax on potential gains every year – even if you haven’t sold.

#4: There Are ETFs for Almost Everything

From cannabis stocks to ESG-focused funds and robotics technology – there are ETFs for almost any niche and sector you can imagine. This allows for very targeted investing, but it can also lead to overexposure in very narrow areas of the market.

#5: Liquidity Can Be Misleading

An ETF’s trading volume might seem high, but it’s not always indicative of liquidity. What’s more important is the liquidity of the underlying assets. If these are hard to trade, you can experience wide bid-ask spreads – especially in times of crisis.

#6: ETFs Can Shut Down

Although ETFs seem like stable investment products, many shut down each year, especially those with low volume or narrow investment strategy. When an ETF closes, your shares are sold, and you get your money back – but this might happen at an inconvenient time.

#7: You Can Short and Leverage with ETFs

Many do not know that there are ETFs that allow you to speculate on markets falling – the so-called inverse ETFs. In addition, there are leveraged ETFs that can give you 2x or 3x exposure to a market. However, these are complex and risky, and rarely suitable for long-term investing.

Our team may have used AI to assist in the creation of this content, which has been reviewed by our editors.